“Between credit risk and interest rate risk, boy, I would I rather take on rate risk,” Roth said in the article. “Interest rate risk, you lose the opportunity cost of yield; credit rate risk, you lose everything.”

“Perhaps the largest risk to bank loans is the potential for a U.S. recession in the near future,” Morningstar analyst Timothy Strauts explained. “While this is not expected by the majority of surveyed economists, current federal spending cuts will have a negative impact on GDP growth in the near term. A recession could increase defaults in the bank-loan sector, which would depress the prices of loans.”

Nevertheless, speculative-grade bonds still have low default rates. S&P projects default rates were 2.6% in June 2013 and could rise to 3.1% in June 2014. In August, the default rate for leveraged loans was 2.2%. The long-term average has been 4.5%.

Observers, though, warn that a flight to quality could cause a sell-off in bank loans, but there has not been a big enough move in investment-grade debt to instigate an exodus from high-yield yet.

“Advisors really like loan funds for their floating rate nature—it greatly reduces their interest rate risk so investors aren’t burned in a rising rate environment. Still a credit risk, but with low rates elsewhere, they’re stuck with this for income,” Jeff Tjornehoj, head of Lipper Americas research, said in the article. [Bank Loan ETFs for Yield and Rising Rate Hedge]

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.